The term 'Dependency Theory' is included in the Economics edition of the Financial Dictionary. Get your copy on Amazon in Kindle, Paperback or Audio edition. Check for lowest price here...
Dependency theory is the idea that resources move from the poor, less developed nations of the periphery to the nations which are wealthy and called the core. The theory states that the wealthier nations enrich themselves at the expense of the poor countries. The central idea of this theory believes that the rich countries become enriched while the poor ones become impoverished because of the way in which poor countries have been integrated within the world’s trade and financial system.
The theory came about in response to modernization theory. This was an older developmental theory that stated every society moves through a variety of stages of development which are still similar to one another. Modernization theory claims all regions which are less developed are now in a situation similar to the one that today’s more developed regions once experienced long ago.
It believes that the job of assisting the less developed areas in escaping from poverty lies in pushing them quicker along the common developmental path. World institutions can do this by using a variety of different policies and tools, like the transfer of technology, investment, and more common integration between the world markets and the under developed world.
The dependency theory chose to reject this world view. It argued that the less developed nations are not simply more barbaric versions of the industrialized nations. Instead they contain one of a kind structures and features which are all their own. It acknowledges most importantly that these lands are in the unenviable position of being the weakest participants within the world’s market economy.
This long held dependency theory does not have many followers as a principle argument any longer. There are a number of writers who make the case that it has a place because it is still relevant as a means to explain the present day global distribution of prosperity and wealth.
Free market economists have harshly criticized dependency theory. Among the major critics of it are economists like Martin Wolf and Peter Bauer. They cite three different reasons that it is not a fair theory to utilize in international policy and developmental approaches. These include a lack of competition, problems with sustainability, and opportunity costs domestically.
The lack of competition refers to the problems that arise from subsidizing industries which are within those under developed nations. Thanks to the prevention of imports from outside of the country, the domestic industries will not have motivation to improve the quality of their goods, to make their customers happy, to strive for greater efficiency in manufacturing and distribution, or to explore better innovations in research and development.
Problems with sustainability relates to industries which are in fact dependent upon support from the government in the form of subsidies, tariffs, import quotas, and other measures. These firms and entire industries even can not continue in business for long without such government support. It is especially the case in nations which are poorer. They require huge amounts of foreign aid as compared to countries which are better developed.
Opportunity costs domestically are those chances which the country loses by having to spend money supporting industries using its treasury. They might instead invest this money in spending on other projects. They could develop the nation’s internal infrastructure, provide welfare programs to the poor, or sponsor capital and technology projects. There are also problems from tariffs and import restrictions which lead to higher prices for the consumers. It forces consumers either do without such goods or to pay higher prices for them in lieu of purchasing other goods they might need or want.
India is a classic argument against this dependency theory. Once the nation abandoned the state controlled model of its businesses and key industries, it instead migrated to freer open trade internationally. The economy improved dramatically following this decision.